Complex billing and invoicing requirements due to the supply and valuation provisions of the GST bill could complicate taxation for IT companies and make life difficult for the services sector in general, and IT industry in particular.
- Tax Rate
- Elimination of cascading effect
- Business Process Change
1 – Tax Rate
IT services will definitely get taxed at a higher rate than the prevailing Service Tax rate of 14.5%. Thus prima-facie it appears that cost of IT services would jump, especially for end customers who do not claim input credit.
In case of packaged software sales, in most of the states both VAT (5%) and Service Tax (14.5%) is applied leading to dual taxation with effective rate of tax touching 20% due to dual tax and tax-on-tax effect. Under GST, this is likely to come down.
2 – Elimination of cascading effect
IT service providers, under GST would be able to set-off input GST on purchase of Goods required for setting up the necessary IT infrastructure with their GST output liabilities. Thus, in the long-run these benefits would ultimately flow to end users as IT service providers would lower their costs.
3 – Business Process Change
Currently, IT services are governed by a simple regime, where there is one single point of taxation—the central service tax and one single point of registration. Under the GST regime there are three tax points: central GST, inter-state GST and state GST. Multiplying three GSTs with 37 jurisdictions take the total number of points of taxation to 111. This means IT companies, as other services firms, will have to register and file compliance reports at as many as 111 points.
The ‘place of supply’ provision of GST may require multiple invoicing if services delivered under a single contract are delivered from various offices/centres of the same entity
IT units in special economic zones (SEZs) will lose some inherent advantages because there is no provision for upfront tax exemptions in the GST bill. As a result they will have to apply separately for refunds. SEZ units have enjoyed upfront exemptions so far.